Bumper Lloyds cash call could close market

Bank's executives evaluate alternatives to the Government's asset protection scheme
Click to follow

City fund managers fear that a bumper rights issue from Lloyds Banking Group could close the rights issue market for other companies.

One leading institutional investor said: "If we are asked to back a big cash-call from Lloyds it will suck the liquidity from the market for companies seeking new funds." Another big investor said: "We were expecting a second-wave of rights issues this autumn but uncertainty over Lloyds has cast a shadow. Most investors will have to put up new money if Lloyds comes back for a new capital raising."

Lloyds, which is under pressure to raise new capital, is now looking at a variety of cash-raising alternatives, which could include a Barclays-style private placement. Barclays avoided having to go to the Government for funding last year by bringing in new Gulf investors.

Chairman, Sir Win Bischoff, who started work last week, and chief executive, Eric Daniels, are considering options ranging from a much smaller capital raising – of up to £10bn – and a slimmed down take-up of the Government's asset protection scheme (Gaps) to meet the necessary capital ratios required by the Financial Services Authority, sources close to the group said on Friday.

"All possibilities remain open. The point is that the bank is in a much stronger position than it was earlier this year, and this means that there are more options available to the board. There is a new confidence about the bank's future," said one source.

Lloyds had been in discussions with the Treasury about insuring the £300bn of toxic assets on its books but the cost of the scheme is high at about £15.6bn and it will increase the Government's stake, which Lloyds wants to avoid. Sir Win and Mr Daniels believe that a middle way – mixing capital raising with partial insurance – is now a viable alternative. Lloyds had to issue a statement to the London Stock Exchange on Friday after reports that the bank would fail the regulator's stress test if it withdrew from the scheme altogether. However, Lloyds confirmed that it has not ruled out withdrawing from Gaps.

But Lloyds hopes talks now taking place with the Treasury, UK Financial Investments Limited (UKFI), which owns 43 per cent of the bank, and the FSA will help it to reach an alternative in the interests of all shareholders.

Credit Suisse analyst Jonathan Pierce estimates Lloyds will need to raise £25bn if it wants to stay out of the scheme. Lloyds, along with Royal Bank of Scotland, is also still in talks with the Treasury over meeting the EU competition rules following its receipt of state-aid. Competition commissioner Neelie Kroes is due to give her decision in the next few weeks and then the banks will have five years in which to divest. Lloyds has a dominant share of the UK mortgage market while RBS has over a third of the business lending market. One analyst said that if Lloyds separated its mortgage business, Halifax, acquired with the HBOS merger, until the housing market recovers, it could fetch a fancy price.